How Do Cars Depreciate?
It is one of life’s certainties that most cars depreciate in value
We have to be careful when purchasing that fun sports car, or even the one that’s supposed to be our main mode of transport between home, office and taking the kids to school.
Depreciation is simply the difference in market value between the original purchase price and the current value. There will come a time when we want to replace our car and nobody wants to be unprepared in terms of its resale value. And of course we want to know that the car we’re exchanging for a new one has not depreciated more than is the norm. It goes without saying that you want the best possible price for your used car when you either sell it privately or trade it in as part exchange on the new purchase.
Most experts will tell you that, on average, cars lose between 40% and 60% of their original value during the first 3 years, or between 15% and 20% each year. In fact, it starts depreciating in value the moment you drive it out of the showroom. Why? Think of the difference: wholesale price vs. retail price. When you take possession of the car it reverts back to wholesale price since, if you were to sell it back immediately to a dealer, he would have to increase the price again when he sells it to the next buyer. So, to the market the car is never worth more than its wholesale price.
Some Depreciate Faster than Others
Factors that will cause some cars to depreciate faster than others include the following:
- Mileage and General Condition ? If you drive, on average, more than 10,000 miles a year your car could depreciate faster than similar cars that travel less in the same period. A car that appears to have been looked after well by its owner will also maintain its value for longer and depreciate more slowly. Cars with obvious dents, scratches and ‘’tired’’ interiors will undoubtedly be prone to faster depreciation too.
- Validity of Warranties ? Most cars are sold with warranties of up to 3 years; however, some manufactures now offer better warranties, even up to 7 years. The longer the warranty, the slower the depreciation.
- History ? Cars with fewer owners tend to depreciate slower ? the same goes for those with good service and maintenance records.
- Reputation ? Because of the ease with which we can access information today ? mainly because of the internet ? we can quickly read up what car journalists and the public have to say about any number of issues relating to which cars may be a better buy than others; that includes people’s opinions about which cars are better, also in terms of depreciation.
- Running Costs ? It seems that cars that are cheaper to run and maintain depreciate more slowly, for instance cars which are more fuel efficient. Those would, typically, be smaller city cars and super minis as opposed to the bigger saloon cars and SUV’s. Having said that however, it does not necessarily mean that the cost of fuel is the only important issue, since long-term depreciation should never be taken out of the equation. Choosing a car that holds its value better than its competitors in the longer term would be a wise decision. Issues relating to aspects of service and maintenance will also impact on how quickly or how slowly a car depreciates.
- High Demand ? Very popular models, especially when supply is limited, tend to depreciate more slowly too since buyers may be willing to fork out more for those.
Even though we all accept the inevitability of depreciation, we should not forget the basics: Minimise the effect of depreciation by doing all you can to look after your car as there will come a time when you want to sell it at the best possible price.